Market movers today
In the UK, the key release today is the labour market report for June. Average weekly earnings growth has decreased in recent months and the subdued wage growth highlights the lack of underlying inflation pressure, diminishing the likelihood of a rate hike by the Bank of England for the remainder of 2017. We expect the unemployment rate to stay unchanged.
In the euro area, focus is on the first release of Italian Q2 GDP figures, where we expect growth of 0.4% q/q in line with positive signals from leading indicators such as PMI. Although we project the modest economic recovery in Italy to continue, with annual GDP growth of 1.4% this year, risks are still looming in the background for the country.
The minutes from the FOMC meeting in July are due for release in the US. Focus will remain on the discussions of the timing of quantitative tightening (we still expect tightening to be announced in September) and any comments on how concerned the Fed is about the low inflation which it now describes as ‘below 2%’ (previously ‘somewhat below 2%’).
Today the UK government will publish a position paper on possible solutions to the issue of the border between Northern Ireland and the Republic of Ireland fol lowing Brexit.
Selected market news
Risk-on sentiment continued yesterday and the 10Y German bund yield rose another 2.5bp and the yield curve steepened further. The move in the 10Y German yield was almost mirrored in periphery yields, hence the spreads stayed broadly stable yesterday. While a more sustained sell-off does not seem to be looming near-term, this week’s risk-on sentiment has retraced most of last week’s gains.
EUR/USD slid further but in our view this is a consolidation phase with the cross taking a breather before the next move higher. In the short -term, the upside in the cross is likely capped with stretched positioning long EUR/USD and a US economy regaining strength as reflected in the US retail sales figures released yesterday. The stronger US data could point to a continued fall in EUR/USD but in our view the underlying forces for higher levels should dominate. Instead, the USD is likely to continue strengthening versus the JPY.
Swedish inflation in July surprised on the upside and solidly breached the 2% line. The acceleration was mainly due to package holidays which showed an all-time high yearly rate of 30.3%. This extreme development seems to come from a combination of a new calculation method, strong demand for holidays abroad and possibly some lagged krona effects. The Riksbank minutes from July mentioned package holidays’ contribution to inflation and argued that the high inflation outcome may support inflation expectations and hence a loosening of monetary policy but it still concluded ‘underlying inflationary pressures in the medium term have probably still not risen’. We expect the governing board to stick to that interpretation for now. Note that the SEK is already trading 2.5% stronger than the Riksbank forecast.
